DBRS Confirms All Classes of Colonnade CRE 2017-1 Sarl

DBRS Ratings Limited (DBRS) confirmed provisional ratings of 11 tranches of an unexecuted, unfunded financial guarantee (the Senior Guarantee) referencing a portfolio of commercial real estate (CRE) loans (the Portfolio) originated and managed by Barclays Bank PLC (Barclays) and its affiliates as follows:

-- GBP 2,273,108,669 Tranche A at AAA (sf)
-- GBP 51,854,094 Tranche B at AA (high) (sf)
-- GBP 49,025,689 Tranche C at AA (sf)
-- GBP 32,055,258 Tranche D at AA (low) (sf)
-- GBP 30,169,655 Tranche E at A (high) (sf)
-- GBP 29,226,853 Tranche F at A (sf)
-- GBP 43,368,879 Tranche G at A (low) (sf)
-- GBP 41,797,543 Tranche H at BBB (high) (sf)
-- GBP 37,083,534 Tranche I at BBB (sf)
-- GBP 57,825,172 Tranche J at BBB (low) (sf)
-- GBP 10,284,609 Tranche K at BB (high) (sf)

All trends are Stable.

The rating confirmations come after the stable performance of the securitised loans between inception and Q3 2018. The notional amount for Tranche A has been reduced to GBP 2.3 billion from GBP 2.5 billion at issuance following the repayments/removals of a total seven securitised loans, thus improving the credit enhancement for Tranche A.

Colonnade CRE 2017-1 SARL (the Guarantor) is a synthetic balance sheet commercial mortgage-backed securities structured in the form of a financial guarantee. Barclays bought protection under a junior financial guarantee (JFG) for the first loss piece (FLP) from Colonnade CRE 2017-1 Sarl but has not executed the contracts relating to the senior tranches (senior financial guarantee, SFG). Under the unexecuted guarantee agreement, Barclays has transferred the remaining credit risk (from 8% to 100%) of the Portfolio. DBRS only rates the SFG tranches, which were not executed at closing, and DBRS’s ratings remain provisional. The junior tranche was sold with the JFG executed. The financial guarantees reference 81 (88 at inception) UK loans, all fully ring-fenced with no additional subordinated debt, and are set to expire in May 2023 at the latest. The transaction does not envisage any revolving period, although the referenced loans may be subject to extension/refinancing.

With the repayment/removal of seven securitised loans, the portfolio’s total facility commitment (including undrawn facilities) has reduced to GBP 3.3 billion from GBP 3.5 billion at issuance. As such, the guaranteed obligation notional amount (GONA) amortised to GBP 2.9 billion as of the August 2018 interest payment date (IPD) compared with GBP 3.1 billion at inception. As of the last IPD, 26 borrowers have not yet fully utilised their facilities. To reflect the possibility of further drawings, DBRS has modelled all the loans assuming they are fully drawn (term and revolving credit facility).

DBRS based its analysis of the syndicated loans on the pre-syndication amount and then scaled back the debt amount to the securitised portion when calculating transaction-level proceeds.

There are 2,932 properties securing the whole portfolio, a slight increase since issuance. This is partially due to the renewal of one loan that has seen a large number of residential properties added. The renewed loan, however, still shows a low loan-to-value as of August 2018 IPD.

The market value geographical concentration of the portfolio as of the August 2018 IPD remains stable with the top three regions being Greater London (59.0% versus 58.0% at issuance), South East (8.7% versus 8.6% at issuance) and North West (5.8% versus 6.3%). DBRS notes that although the portfolio is still concentrated in economically strong regions, the value of CRE assets is strongly linked to the economical performance of the UK economy, which is highly dependant on the result of Brexit. DBRS did not apply any additional value stress on the portfolio in this rating action; however, additional stress might be warranted following a stressed Brexit scenario and/or if DBRS downgrades the rating of the UK below its current AAA level.

DBRS followed the same method as issuance in sizing the portfolio and compared the sizing outcome with the Q3 2018 reported GONA and concluded the rating confirmations for all classes.

The ratings assigned to the Tranche K notes materially deviate from the rating stress levels that the notes can withstand according to DBRS’s direct sizing hurdles, which are a substantial component of DBRS’s “European CMBS Rating and Surveillance” methodology. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating stress level implied by a substantial component of a rating methodology. In this transaction, the assigned lower rating is because the class of note cannot pass upgrade stress.

DBRS will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology.”

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these include Barclays.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Mattia Pauciullo.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

A decrease of 5% and 20% in the DBRS values, derived by more conservative DBRS’s underwriting assumptions, would lead to a downgrade of the rated tranches as noted below:

Tranche A Notes Risk Sensitivity:

--5% decline in DBRS value, expected rating of Class A Notes to AA (high) (sf)
--10% decline in DBRS value, expected rating of Class A Notes to A (high) (sf)

Tranche B Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class B Notes to AA (sf)
--10% decline in DBRS value, expected rating of Class B Notes to A (sf)

Tranche C Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class C Notes to A (high) (sf)
--10% decline in DBRS value, expected rating of Class C Notes to A (low) (sf)

Tranche D Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class D Notes to A (sf)
--10% decline in DBRS value, expected rating of Class D Notes to A (low) (sf)

Tranche E Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class E Notes to A (low) (sf)
--10% decline in DBRS value, expected rating of Class E Notes to BBB (high) (sf)

Tranche F Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class F Notes to A (low) (sf)
--10% decline in DBRS value, expected rating of Class F Notes to BBB (high) (sf)

Tranche G Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class G Notes to A (low) (sf)
--10% decline in DBRS value, expected rating of Class G Notes to BBB (sf)

Tranche H Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class H Notes to BBB (high) (sf)
--10% decline in DBRS value, expected rating of Class H Notes to BBB (sf)

Tranche I Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class I Notes to BBB (sf)
--10% decline in DBRS value, expected rating of Class I Notes to BBB (low) (sf)

Tranche J Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class J Notes to BBB (low) (sf)
--10% decline in DBRS value, expected rating of Class J Notes to BB (high) (sf)

Tranche K Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class K Notes to BB (high) (sf)
--10% decline in DBRS value, expected rating of Class K Notes to B (sf)

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Mattia Pauciullo, Senior Financial Analyst
Rating Committee Chair: Erin Stafford, Managing Director
Initial Rating Date: 17 December 2017

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.